A Denny’s in Florida. (AP Photo/Alan Diaz)

Dow Jones Newswires | Troubled restaurant chain Denny’s hopes a novel value menu, limited-time offers and a
plan to expand at highway rest stops can help revive the brand.

But some investors and analysts are skeptical Denny’s new sales
initiatives will succeed, especially after years of losing customers.
Instead, they argue the family-dining chain’s cost structure needs to
come down after selling hundreds of company-owned stores to franchisees.

Further cutting overhead costs may be needed to tempt new investors,
analysts say, especially given a run up of more than 70% in shares since
Chicago-based activist investor Oak Street Capital Management as well as Dash
Acquisition LLC took a stake in the company. Shares closed Monday at
$3.91.

The activists have put Denny’s management on the hot seat with an attempt to install three board members to shake up the company. The group has been critical of Denny’s management for years of market-share declines, arguing as “marketing gimmicks” like food giveaways failed to attract consistent customers, price hikes throughout the years have turned off others.

“It’s one thing to have a message of everyday affordability, but another thing to have it,” Patrick Walsh of Oak Street Capital, said. “You have to make sure you’re delivering that value.”

Better sales could lead to bigger profits after Denny’s over the past several years paid down debt by more than half and sold hundreds of stores, mostly underperforming, to franchisees, resulting in better margins.

“If Denny’s can get any sales traction, there’s a lot of operating leverage you can get,” said Michael Gallo, analyst at C.L. King & Associates.

A meaningful sales improvement at Denny’s is no guarantee, especially after years of stagnation.

“It really is a zombie brand that just sort of moves along, doesn’t grow, doesn’t go away,” said Darren Tristano, executive vice president at Technomic Inc., a restaurant industry consultancy.

That’s why some observers, including the activist group, suggest Denny’s take a sharper knife to costs. Denny’s, a chain with 1,500 restaurants, has sold close to 300 of its company-owned locations to franchisees in recent years, though some say its expense line has not declined as much as they could have.

Steven Anderson, analyst at MKM Partners, notes overhead costs were 9.4% of Denny’s 2009 sales, up 300 basis points over the last three years. Normally, as restaurants sell stores to franchisees, those costs fall.

“They haven’t rationalized their expense line for a smaller company-owned base,” said Anderson.

Denny’s Chief Executive Nelson Marchioli declined an interview request. But a Denny’s spokeswoman says the company has trimmed overhead at its sold stores and continues to look for more costs to cut. Denny’s says it is encouraged by its plans to boost sales, but, like other restaurant chains, remains cautious due to uncertainty.

Still, there are some conditions that lend to optimism on the top line. With a better environment for restaurants and easier year-over-year comparisons ahead, upcoming promotions at Denny’s, like its new “$2, $4, $6, $8 Value Menu” with 16 products at those prices and other limited time offers, could fare better than they would have in prior years. In tests of the value menu in recent months, Denny’s stores saw enough of an improvement in customer traffic to get 95% of franchisees on board with the promotion, the spokeswoman said.

The company also expects to get a sales lift of up to 8% annually from a deal to convert up to 140 restaurants at Flying J Travel Centers to Denny’s. Most of the stores will be operated by franchisees.